Retiring Early in Turbulent Times

When I retired in my forties in October, 2007, the stock market was near its peak, the economy was strong, and employment was good. Since then, the market has declined over 40%, the economy is likely in recession, and unemployment is at 6.5%, the highest level since 1994.

Obviously, the past year wasn't the greatest time to retire early. However, we did survive our first year, and I think the prospects of staying in retirement are still good. Here's a brief financial assessment of how well prepared we were for the financial crisis during our first year of retirement living.

What Has Worked

Reviewed options with our financial advisor, in advance. About a year before retiring, I started working with our financial advisor on retirement scenarios. I covered a +/- 20% range retirement incomes, paying off or keeping the mortgage, and different financial returns. As a result, we had a good idea of how much was needed to comfortably enable retirement in different economic scenarios.

Our advisor's analysis showed the biggest risk of failure was a bear market during the early years of retirement. Although we prepared (see next bullet), we didn't expect a scenario as bad as the one we are now experiencing.

Put expected near term expenses in cash or cash equivalents. We were conservative and kept approximately five years of expected expenses in CDs, bonds and money market funds. Theoretically, we can wait five years for the stock market to recover. However, in year four, I may start to be anxious :-)

Health insurance coverage. I was eligible for our company's retiree health insurance plan, which provides the same coverage as when I was employed, but at four times what I paid as an employee. It would have been hard for me to retire without guaranteed health care coverage, since a major medical incident without coverage can be very costly.

What Didn't Work

Lump sum diversification. After transferring part of my company retirement funds to an IRA, I invested the cash portion (about 50%) in a diversified stock portfolio, right at the peak of the stock market. Since historical data investing as a lump sum was better than dollar cost averaging, I had convinced myself lump sum was the right approach.

Unfortunately, this part of our savings has declined 40% along with the rest of the market.

What I Wished I Had Done

Pay off the mortgage. I wrestled with this one for a while and finally decided keeping the mortgage was worth the tax benefits for at least the next couple years. If I had sold some of the stock portfolio to pay off the mortgage, I would have avoided almost all of the 40% decline for that part. Ah... hindsight is 20/20 :-)

What Was Really Lucky

Did not diversify most of my company stock. Since the majority of my retirement account is in company stock, the plan was to sell it in stages and reinvest the proceeds into a diversified stock portfolio. It has taken longer than expected and I have kept most of the sales proceeds in cash. The delay has been fortunate since my company stock is only down 16% versus 40% for the market.

Of course, I was very lucky. Most experts would recommend against have the majority of one's savings in one stock.

Financially, our first year in retirement has be very good, given the poor economic situation. I expect our second to be equally challenging. Hopefully, I will still be able to give a positive assessment a year from now :-)

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This is not financial or retirement advice. Please consult a professional advisor.

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